APR is the Annual Percentage Rate of a mortgage. Unlike the interest rate — which only reflects the cost of the money you borrow — APR also folds in most of the upfront fees you pay to get the loan: origination charges, discount points, mortgage insurance premiums, and certain closing costs.
Because APR bundles in those fees, two loans with an identical interest rate can carry very different APRs. A loan with more points or a higher origination fee will always show a higher APR than an otherwise identical loan with fewer fees, even though the payment itself starts out the same.
How it works
APR is calculated by spreading your upfront fees across the life of the loan and restating the whole package as a single annualized percentage. Think of it as answering one question: "If every dollar I pay — interest and fees — were expressed as one rate, what would that rate be?"
Say two lenders quote you loans with the same interest rate. Lender A charges $2,000 in fees on a loan; Lender B charges $6,000 in fees on the same size loan. Lender A's APR will come out lower than Lender B's, because Lender A is asking you to pay less to get the same rate. That gap is exactly what APR is built to expose.
APR is required on every consumer mortgage disclosure under the federal Truth in Lending Act. You'll see it printed right next to the interest rate on your Loan Estimate and Closing Disclosure — federal law requires both numbers to appear together, with neither buried or downplayed.
When it matters to you
APR matters most the moment you're comparing offers from more than one lender. A quote that only shows a rate — with no APR next to it — is an incomplete quote. Always ask for both, on the same day, for the same loan amount and loan type, so the comparison is apples to apples.
APR matters less if you plan to sell or refinance within a couple of years, because the fee portion of APR is amortized as if you'll keep the loan for its full term. A loan with a lower APR but more points might actually cost you more if you move in year two.
Common mistakes
- Shopping only by the headline rate and never asking for the APR — that's exactly how a low rate hides a high fee load.
- Comparing an APR from one lender to a plain interest rate from another; they aren't the same measurement and the comparison is meaningless.
- Assuming a lower APR is always the better deal without checking how long you'll actually keep the loan.
- Forgetting that APR doesn't include every possible cost — title fees and some third-party charges can be excluded depending on the disclosure rules in your state.
FAQs
Is APR the same as my monthly payment?
No. Your monthly principal-and-interest payment is calculated from the interest rate alone. APR is a separate, annualized figure used only to compare the total cost of different loan offers — it isn't used to calculate what you actually pay each month.
Why is my APR higher than my interest rate?
APR is almost always higher than the interest rate because it adds in upfront fees. The bigger the gap between the two numbers, the more you're paying in points and closing costs relative to the loan amount.
Can two lenders quote the same interest rate but different APRs?
Yes, and it happens constantly. If their fees differ, their APRs will differ even with an identical interest rate, which is exactly why APR — not rate alone — is the right number to compare across lenders.